Financials Group is a professional, informative and high-quality financial magazine. It contains a global collection of important money-earning guides in areas of real estate, stock market, commodities trading, forex market etc. For more about our other business(es), visit: About Our Book Store or Contact Our Team.

The term "return on investment" (ROI) is well-known for current financial and business world. However, do you know exactly what it does mean actually for your wealth building and how to accurately calculate ROI for best financial returns? In fact, there are three common methods to evaluate Return-On-Investment (ROI) accurately, as follow:

Three Common Methods to Calculate Return-On-Investment (ROI)

(i) Cash-on-Cash (CoC).

Cash-on-Cash (CoC) is a very straight-forward formula for accurate ROI calculation. If $1K cash is initially invested and it finally grows by another $1K cash, it is then a 50% return rate for cash-on-cash, which is a pretty good financial return for most investors or wealth building professionals.

(ii) Total Investment Amount (TIA).

Total Investment Amount (TIA) is a completely different financial concept for ROI (Return-On-Investment) calculation against Cash-on-Cash (CoC). Say if you put in $10K for a $100K mortgage, then its growth rate should be calculated on $100K (total investment amount), not just what you initially put in. This may be arguably a less important formula because the amount you initially put in should be financially more relevant and meaningful to you.

(iii) Lost Opportunity Cost (LOC).

Lost Opportunity Cost (LOC) is a very important method for every accurate ROI calculation and investment risk consideration. If you want to raise money from your business partner, you should demonstrate the financial loss he might incur if he chooses not to invest. If you offer an investment opportunity that can pay a 20% annual interest rate but the lender has money for something else that can only pay 5% instead, you should then show him how much money he will lose, i.e.: his lost opportunity cost (LOC), if he eventually decides to pass up your investment opportunity.

The above are three common methods, by definition, to calculate or evaluate Return-On-Investment (ROI) accurately. However, how should you apply these formulas in real life for your basic wealth building or for best financial returns? The following is an excellent example to let you better understand how most rich people consider investment risk against Return-On-Investment (ROI).

We Should Never Do What the Rich People Do

The rich people usually become rich because they can develop a successful wealth-building formula that pays them high financial rewards, or called Return-On-Investment (ROI), on what they commonly invest in stock market, real estate market, or even their day-to-day booming business. After they have made substantial amount of money, without intermediate failure, the wealthiest among the wealthy people usually switch their profit-making formula. Most of them will turn to buy lower-risk earning tools such as government bonds, treasury bills or some other kinds of public utility funds that can pay financial return rates of only 5% or even less.

Why the richest people would switch their profit-making formula in this way? It is simply because they need to confidently keep their financial capitals and accurately protect their principle assets. After sufficient wealth building, they usually prefer accepting a safe financial return instead of taking higher risk for better Return-On-Investment (ROI). In addition, it is usually more easy to start with a high financial return rate when principle amount is still small, but it will become much more difficult to practically keep the same high financial return rate once the principle amount is large enough.

Since the rich people have a different risk formula and ROI consideration than ordinary people, now you should know why they normally consider a relatively low Return-On-Investment (ROI) of 5% or even less. As a result, you shall never follow what the rich people do for only basic wealth building unless you think you have made substantial amount of money. For those who are not wealthy enough, do always keep using the above three common methods to accurately calculate or evaluate Return-On-Investment (ROI) of any of your profile for best financial returns. You can then find out exactly which earning tools should best fit for your actual wealth-building needs.